Pareto's Republic and the New Science of Peace

by Filip Palda

  So a brief road map may help understand how the ideas will flow. The first part of this chapter explains how notions of competition in private markets can be applied to political markets. First, I start with an analogy, then I explain why the analogy is not perfect. People in a group decide differently from the way an individual decides, and when people consume a government product, one size must fit all, unlike in a private market. The consequence is that political markets are innately less able than private markets to tailor production to private needs. In addition to this inevitable feature of political markets, we come upon the problem of politicians trying to block access to power, thereby restricting competition. As a result, there are two immense problems facing societies that wish to have competition in politics. The first problem is that there are natural barriers to satisfying everyone’s needs. The second problem is that there are artificial barriers put in place by politicians.

  Despite these obstacles, there are two hopes for achieving political competition. The first resides in people’s mobility. If you can run away from an abusive government, then you deprive it of your personal wealth. The consequence is that mobility disciplines irresponsible governments by confronting them with the loss of their best and brightest. The second hope lies in the formal institution of democracy.

  Neither of these mechanisms for producing political competition is perfect. What is laudable about democratic systems is that despite their lack of perfection, they can put into power people who are generally peaceful. To understand this road map, we must begin by picking apart the concept of competition, be it in private or political markets. Competition is the force that can produce efficient government. Let us see if this claim makes sense.

  What is a political market?

  In private markets, competition controls both firms and consumers, forcing both parties to reveal their preferences and their costs. One may think a similar force could constrain governments and lead them to provide us with public goods and the protection of the commons at some reasonable “price.” It is tempting to see an analogy between a government that provides a service and a private firm that does the same. Let us see whether the analogy can be pushed far enough to tell us what ingredients are needed to get Pareto-efficient government.

  “Political” and “market” seem like two words that don’t belong in the same phrase. Politics is the realm of rulers, and the market is the business of producers. The phrase “political market” starts to have some meaning if we think of politicians as producers of public goods and voters as consumers who pay a tax “price” for these public goods. Though it is sometimes hard to believe, we elect politicians to be our servants, not our masters. These servants have a duty that is similar to the duty of producers in a private market. We voter-consumers elect politician-producers to provide good quality government services at a low tax price. In this sense, if we are lucky enough to live in one, a democracy is nothing more than an instrument for controlling the quality and price of the government we receive.

  The analogy between private and public markets is not perfect. In private markets, the consumer can choose the precise amount of product to consume and may switch producers if he or she is not happy. In political markets, each voter-consumer must accept the same offering of public goods as everyone else receives, and he or she can only switch politician-producers once every several years, and then only with the backing of other voters. In political markets, choice and consumption are collective pursuits. The power of our analogy is that by allowing us to see that the political market works like an imprecise, unwieldy economic market, we can assess it using the tools of modern economic reasoning, which was our guide in exploring how to get Pareto efficiency in private markets.

  The first to apply the tools of economics to politics were Duncan Black, Friedrich Hayek, James Buchanan, Gordon Tullock, Anthony Downs, and Gary Becker. Their efforts, aptly summarized in Dennis Mueller’s opus magnum Public Choice III, gave rise to what is now known as the field of Public Choice. They identified the problems political markets face in creating the climate of competition needed to bring people the level of public goods they desire. How to get government to give us what we want is an age-old question that goes back to Cicero’s De Officiis where he wrote that,

  For if each of us proposes to rob or injure one another for our personal gain, then we are clearly going to demolish the link that unites every human being with every other. Just imagine if each of our limbs had its own consciousness and saw advantage for itself in appropriating the nearest limb’s strength! Of course our whole body would inevitably collapse and die. In precisely the same way, a general seizure and appropriation of other people’s property would cause the collapse of the human community.

  After Cicero, Madison, Montesquieu, and subsequent political thinkers took up the theme of conflict between private and public interest. Each of these thinkers provided some insights, but it took the arrival of Public Choice experts to snap together the pieces of economic and political thinking into a seamless whole. As the pieces clicked, Public Choice produced a simple, clear, revolutionary way of thinking about how private and political markets should work together. This is one of the great intellectual achievements of the 20th century. In a manner that these thinkers could not foresee, their accomplishments formed the basis of a complete science of peace based on Pareto efficiency.

  Political competition

  Our understanding of political competition starts with some words by Evsey Domar, a great teacher of economics. There is perhaps no better an explanation of what competition means than his: “The power exercised by consumers over producers requires no police, no compulsion, and no letters to the editor of The New York Times. It works silently, like gravity. All the consumer has to do is not come back to the store, not buy the same product ever again” (page 36). The power Domar is talking about is that over prices. By changing whom they buy from, consumers force greedy producers to either lower their prices or else to go out of business. Competition pushes producers to lower their prices almost to the level of their costs. The same principle applies in labour markets where competition between firms drives up wages to reflect the productivity of workers. This is why economists say that competition is a mechanism for revealing cost and productivity.

  It is all well and fine to speak about switching allegiances, but then why do so many people feel stuck in an abusive relationship with one producer? The feeling of being stuck arises in two instances. Either you do not know what your alternatives are, or you are not allowed to move towards those alternatives. Put differently, being able to switch whom you buy from or whom you sell your labour to depends on knowing what choices are open to you and on the freedom to make these choices. This is why throughout history producers who fear the strength of competition have tried to limit information and choice.

  This precise way of defining competition and identifying its two main ingredients, information and choice, dispel the fuzzy popular misconceptions of competition as war that are so enshrined in popular culture. Michael Crichton’s Rising Sun portrayed the commercial rivalry between the US and Japan as a bloody conflict. Crichton might as well have been thinking of Assyrian king Tikulti-Ninurta who boasted that, “I brought about defeat of his armies, his warriors I overthrew. In the midst of that battle my hand captured Kashtilash, the Kassite king. I trod on his royal neck with my feet like a footstool.” Clearly Ninurta had a drive to compete, but not one we would wish to promote in those with whom we do business. The type of competition that flows from information and choice is not an assault, but rather a form peaceful negotiation. This is why Pareto-efficient exchanges of private goods between people lead to peace.

  The same principle can be put to work in politics. A Pareto-efficient political market is one that allows people to collectively choose the level of public goods and property rights protection that maximizes the potential for Pareto-efficient wealth creation in the private sector. That means getting a government that will sp
end a hundred dollars to fill the pothole that is destroying wheel bearings, axles, and possibly dental work, worth tens of thousands of dollars. It also means getting a government that focuses on providing public goods at some reasonable tax cost. Competition gives voter-consumers an informed choice between several candidates or parties. Information allows voters to decide which candidates are best able to provide public goods at a reasonable tax price, whereas the ballot, and other means of voting to be discussed later, allows voters to exercise that choice.

  Natural barriers to entry in politics

  As alluring as the above analogy between the market and political competition may be, getting a Pareto-efficient government is not easy. There are two main reasons why political markets can only ever be a pale imitation of private markets. The first, and perhaps most important reason, is that political markets do not require that everyone be persuaded, as private markets do. Remember that to be Pareto- efficient, an exchange must have a one hundred percent agreement among the parties.

  If we apply the same principle to political markets, then it is likely that government will become paralyzed. We need to accept something less than a one hundred percent approval rating, which is why most collective choice takes place by majority rule. The challenge this poses to getting Pareto-efficient government is that sometimes a majority will use its coercive power not to promote the purchase of public goods, but rather to exploit minorities through large-scale government redistribution of private resources. We will see later in this chapter that as a consequence, no system of collective choice can work unless property rights are secure from such depredations.

  The second reason for being careful about making the analogy between private and public markets is that the challenges to acquiring information and exercising choice differ considerably between private and public settings. Public Choice scholar Charles Rowley has clarified the nature of the challenge we face in finding a government that promotes Pareto efficiency. In a defining essay on this question, he wrote that if “problems of monopoly, externalities, public goods, and bounded rationality afflicted private markets; they simply ravaged political markets that confronted individuals with massive indivisibilities and severely limited exit options” (page 10). This is a rough sentence to understand so let us break it down into its components.

  By indivisibilities, Rowley means that government produces goods such as health care or education in giant packets that cannot be tailored to any one individual’s needs, the way some private goods may be tailored. This sort of indivisibility makes it difficult for individuals to express their needs as they would when they pay directly for some private good or service. Without such signals from voter-consumers, politician-producers are working in an environment of limited information.

  By problems of monopoly Rowley is saying that when a producer of a private good becomes the sole supplier, consumers suffer, but they can limit their pain by cutting back on their consumption or finding substitutes. However, when faced with a government that has a monopoly on coercion, voters have no substitutes that they can immediately seek out. One must wait years until the next election or the next revolution comes along.

  By externalities Rowley is thinking of common property of a very specific sort. We are used to thinking of virgin forests and shoals teeming with fish as common properties open to devastation by unbridled economic exploitation. Rowley carries this image over to government where treasuries can be thought of as a form of common fiscal property that can be ravaged on a massive scale by battles between interest groups.

  Taken together these points suggest that the problems of commercial markets mutate into monstrosities once we move to political markets. This is due to the indivisible nature of what government produces and the potentially rivalrous means by which society determines that level of production. The challenge Rowley lays down is how to fix an institution that on its own has deficiencies (markets) with an institution that has potentially even greater deficiencies (government).

  In the Review of Economic Literature, economist James Rauch phlegmatically summarized the stunted condition of current knowledge concerning the Rowley challenge: “consensus is lacking on exactly how property rights are secured by a given set of institutions” (page 480). Development expert Avinash Dixit adds to the gloomy mood surrounding the search for Pareto-efficient government by suggesting that “processes of creating the institutions and the apparatus of state law, and of improving them to the point where they function well, are slow and costly” (page 4).

  What Rowley and others are describing are the so-called natural barriers to achieving competitive politics. They are called “natural” because in a sense we must grin and bear them. That is simply the nature of the political beast. Yet there are also barriers that we need not be so sanguine about because it is we who create them. They are artificial because they can be overcome when people agree to make the political system more open. To understand this distinction, a brief summing up could help.

  Artificial barriers to entry

  To summarize the chapter so far, competition is a broad principle that can be applied both to private and political markets. In private markets, competition forces people to reveal their preferences for consumption and their abilities to produce. This revelation of information creates a balanced form of social accounting called Pareto efficiency.

  When applied to politics, competition gives voter-consumers information and choice about their leaders, which these voters then use to choose leaders who will provide the Pareto-efficient level of public services. The problem with this analogy between private and public competition lies in the fundamental difference between collective goods and private goods, as well as in the difference between how choices are arrived at collectively and privately. As if these inherent challenges to getting competitive government were not daunting enough, there is also a list of challenges we create for ourselves. This is the subject to which we now turn.

  Economists use the term “barriers to entry” to describe anything that blocks consumers from becoming informed about and choosing new alternatives. In 1958, in one of the first economic analyses of democracy, Gary Becker wrote that, “In an ideal political democracy competition is free in the sense that no appreciable costs or artificial barriers prevent an individual from running for office, and from putting a platform before the electorate” (page 106). Becker was speaking of politicians, but his idea applies equally well to individuals or groups seeking to influence policy or election outcomes. Artificial barriers to entry do not come about by accident, but rather by the efforts of politicians to protect their positions of power. People in office sometimes change the rules of the political game to make it difficult for new candidates and parties to put their ideas before the public. Public Choice scholars Burton Abrams and Russell Settle explained that this happens because

  Rational, self-interested individuals, groups, or industries seek regulation as a means of serving their own private interests... When regulation has the potential for directly affecting the legislators themselves (e.g., political campaign regulations), the economic approach suggests that the regulation would be designed to serve the legislators’ interest rather than some vaguely defined public interest. (page 274)

  Examples of such barriers are numerous. Think of the government subsidies that established parties vote themselves, or of the manner in which those in power redefine the borders of electoral districts, so-called gerrymandering, in order to secure a majority. I have written in detail about such barriers and you may find reference to them in an article of mine I cite in the bibliography, but there is no need to further catalogue those barriers here.

  What we need to appreciate is that artificial barriers are costly and pernicious. They restrict information and choice, which in turn restricts political competition, which in turn raises the tax price of public goods. They do so in ways that are hard to detect. The causal chain is long and so it is difficult for voters to identify what ails them. Just as som
e successful parasites in nature do not drain their host too quickly for fear of being noticed, so it is with artificial barriers to entry into politics.

  Solution #1 for what ails political competition: mobility

  We can acknowledge the difficulties in getting political competition that Rowley and Becker catalogue without inertly capitulating in our search for some solution to the problem. There is a substantial body of research in history, economics, and politics suggesting that two very powerful forces can come to the rescue of political competition. The first of these forces is mobility. The second is democracy. Let us examine each in turn to see how they can help to create governments that respect and seek to enable the Pareto-efficient functioning of society.

  Long before scholars began to consider democracy and voting at the ballot box to be the pinnacle of societies that had managed to get their governments under control, people were voting with their feet by fleeing the abuse of harsh rulers. Mobility was always, and remains, one of the key ingredients for promoting political competition. We can appreciate this by considering the inverse proposition: anything that blocks the ability of citizens to move from one government jurisdiction to another, temporarily or permanently or simply for the purposes of travel, limits the availability of political information and choice. In the extreme, an inability to explore what different governments in different places have to offer can be considered a form of captivity.